Sweeping changes in environmental markets made 2015 a pivotal year for the voluntary carbon credits, according to respondents in Environmental Finance's annual Voluntary Carbon Market Survey.
A landmark agreement at the 2015 UN Climate Summit (COP21) in Paris, to reduce global greenhouse gas (GHG) emissions, included new support for developing countries in tackling climate change.
2015 also saw European leaders agree to the Market Stability Reserve (MSR), a reform that would remove surplus emission allowances (EUAs) from the EU Emissions Trading System (ETS) – the world's largest compliance market for carbon – in a move designed to bring supply and demand back into balance after the 2008 financial crisis.
However, despite these changes, prices in the voluntary carbon market have stubbornly continued their decline.
Figures from Ecosystem Marketplace's 2015 State of the Voluntary Carbon Market report show that average annual prices, fell to an all-time low of $3.30 per tonne of carbon dioxide (CO2) from $3.80 in 2014.
"There has been a decline in demand for voluntary offsets," says Martijn Wilder a partner at Baker & McKenzie, which was voted Best Law Firm in the survey for the seventh year. "This has resulted in less capital flowing to support the development of voluntary offset projects, such that only the very high quality projects are prospering".
The average price of voluntary carbon credits is now less than half of the peak of $7.30 reached in 2008.
However, despite prices falling for an eighth year in row, most market participants remain optimistic, citing possible demand-side drivers.
The cause of the persistently low prices, according to Toby Janson Smith, chief innovation officer at VCS, which was voted Best Voluntary Standard, was historical oversupply.
despite damnd falling, he argues that, for the second year running, buyers of offsets have redeemed more verified carbon reductions than were issued.
"We saw more retirements in the last couple of years, which is great sign," says Janson Smith. "There is still a fair bit of supply but it's getting used up, which is a good thing, especially when you take market signals like the Paris Agreement, into account."
A record 39 million tonnes of verified carbon offsets were redeemed in 2015, according to Ecosystem Marketplace.
Demand for offsets seems to have turned a corner just as world leaders reached an agreement on new targets for global emissions reductions.
As part of the COP21 agreement, rich countries can choose to offset their carbon emissions by purchasing carbon offsets from poorer countries.
"The reintroduction of a market-based mechanism implied in the Paris Agreement cannot be overestimated," says Thomas Schröder, director of marketing and communications at South Pole Group.
He argues that the previous market mechanism – the Clean Development Mechanism, which was introduced by the UN to help poor countries produce carbon offsets that could be used in large emissions trading schemes – was struggling to keep up with the economic development of India and China.
The market also saw a 10% increase in overall volume, and this trend has continued into 2016, according to some market participants, who see it is a sign that the market is picking up, despite the low prices.
Reasons for optimism
Another key development for the market was the inclusion of climate change into the UN's Sustainable Development Goals (SDG).
The SDGs are designed to replace the eight Millennium Development Goals, which were launched in 2001, and served as a focus for international aid and development finance from UN member countries.
Revised up to 17, the new goals not only take account of the effect that climate change has on achieving the original goals, but explicitly list tackling climate change as one of the goals.
This means climate change projects that generate strong social 'co-benefits' – so called because they are considered additional to carbon emissions reductions – may attract more financing as countries and companies use them to show their commitment to the SDGs.
"When the UN SDGs came out in September, we began matching the project 'co-benefits' according to these goals to help illustrate their impact in terms of economy, ecology and society in general," says South Pole's Schröder. "These projects have the potential to obtain a premium price in the market."
Countries are not the only drivers of demand in voluntary carbon markets. There has been a renewed interest from corporates, according to offset retailer Natural Capital Partners formerly known as CarbonNeutral. Indeed, the increase in volumes last year was partly driven by corporations taking proactive steps to reduce emissions ahead of expected regulations, according to the Ecosystem Marketplace report.
"The COP21 agreement crowned a very good year for carbon credits," says Simon Brown, managing director at Natural Capital Partners. "We saw renewed interest in carbon offsetting, with companies making commitments to reduce carbon emissions through science-based targets and becoming carbon neutral."
Companies have not only increased their commitments, they have also 'deepened' them, according to EcoAct, which was voted Best Advisory Service, Best Project Developer - Energy Efficiency and Best Project Developer Overall.
"Traditionally, buyers of offsets were companies and individuals trying to offset their travel, but that market expanded to include some buyers who began to show more concrete commitments to offsetting their Scope One and Two emissions," says William Theisen, a director at EcoAct.
His views were echoed by K. Sudheendra director and head of operations at Epic Sutainablity.
"There is some upward traction with the number of projects we verify, " says Sudheendra. "Verifications for renewable energy, forestry and community based projects have increased."
2015 also saw Gold Standard, another voluntary carbon credit standard setter, launch a consultation on how to include the revised SDGs into the third iteration of its standards.
The inclusion of environmental issues in the UN SDGs also helped to support the argument that projects should do more to quantify the non-carbon benefits they provide.
The price premium for quantifying these 'co-benefits' is increasingly being seen by developers as a valuable new source of capital for projects.
This is leading to a larger gap between the part of the market that is interested only in purchasing carbon offsets and the part that is interested in the full spectrum of benefits, according to Edward Hanrahan, a director at ClimateCare, which was voted Best Project Developer - Public Health.
"All of the different development outcomes from these projects need to be considered as separate at the very beginning and planned into the project," says Hanrahan.
"It is increasingly becoming recognised that the valuable outcomes from these projects are not just environmental, but also the health and development aspects."
The renewed commitments by world leaders at COP21 to use environmental levers to help developing countries achieve sustainable growth are seen a boon for voluntary carbon markets.
The number of commitments made by countries increased ahead of the Paris Agreement, as countries sought to rise to the occasion, according to Markit, which was voted Best Registry Provider.
"We saw renewed vigour in the market in the lead up to COP with the expectations of an agreement being reached," says Kathy Benini, managing director at Markit. "Peru built their REDD+ registry, Mexico also launched theirs. Colombia also created a domestic voluntary market in 2015. All of this was done in advance of COP."
Things heating up for cook stoves
Cookstove projects were popular with corporate offset buyers in 2015, and credits issued for these projects saw a big uptick.
According to the Gold Standard's first quarterly report on offset supply, published earlier this year, credits from cookstove projects saw 2.2 million retirements in 2015, compared with 1.5 million issued.
Another key area where developers remain optimistic are forestry projects.
Projects such as this year's winner of Best Offsetting Project – The International Small Group Tree Planting Initiative (TIST) – have proved a big hit with companies. These types of project recognise the fact that around 17% of global GHG emissions are from forestry-related emissions. Projects associated with reducing emissions from deforestation and forest degradation (REDD+), in particular, are seen as prime candidates for inclusion in mandatory offset markets. (See box)
High hopes for aviation offsetting
However, the biggest source for optimism in 2015 was the aviation industry.
Transport – aviation and shipping in particular – is the only major GHG emitting sector to be excluded from mandatory national and international emissions reduction schemes. This is because of the difficulty of setting national targets for these international industries.
However, following the success of the COP21 negotiations, these industries have come under renewed pressure to produce their own plans for reducing their GHG emissions.
Industry groups from the voluntary carbon market have been lobbying the International Civil Aviation Organisation (ICAO), ahead of its triannual meeting in September, to allow companies to use voluntary offsets as part of any mandatory compliance model it develops.
"What's on the table is a proposal for VCS and other global standards to submit an application to be recognised so that airlines such as Delta and British Airways could submit a VCU [a type of voluntary carbon credit] in order to comply with the ICAO ruling," says VCS' Janson Smith.
Baker & McKenzie's Wilder argues that both an aviation industry scheme and the inclusion of REDD+ in mandatory markets, like those of California and Australia, are too far off to be felt in prices.
"There is a great hope that the aviation industry will pass a mandatory carbon offsetting scheme and that it will include voluntary carbon credits," says Wilder. "But this, as well as the inclusion of REDD in mandatory markets, are unlikely to materialise in the next year or so."
Despite these reservations, he accepts that the voluntary market continues to play a vital role in helping bring about a low-carbon economy.
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Forestry credits have long been a staple of the voluntary carbon market. However, 2015 saw several key developments that stand to make such projects even more important.
REDD+, a methodology for measuring the carbon sequestration and other environmental benefits of projects that prevent deforestation and forest degradation, has long been linked with potential inclusion in mandatory markets.
In 2010, the then governor of California, Arnold Schwarzenegger, signed a memorandum of understanding for the inclusion of REDD+ credits from two South America states in its mandatory cap-and-trade system.
The plan, which was halted twice due to political instability in Brazil and a lack of clarity on jurisdictional issues around redemption of the credits, again hit the headlines in 2015 when a new proposal put in front of California's Air Resources Board (ARB) suggested that offsets from REDD+ projects could be included in the scheme as soon as 2018.
"Having jurisdictional REDD+ credits included in compliance markets could be a really good thing for the market as a whole," says Kathy Benini, managing director at Markit, which was voted Best Registry Provider.
The increased demand for such carbon credits from mandatory carbon markets, will help keep prices high for these types of projects, many believe.
However, after COP21, each country now has its own national emissions reduction targets. Those with REDD+ credits must therefore decide whether or not they want to allow their credits to be sold into another jurisdiction.
If the California planis adopted, emitters in the programme may choose to purchase offsets from the state of Acre in Brazil or Chiapas in Mexico to meet their mandatory targets. Other regions producing forestry credits are expected to follow.
Elsewhere, REDD+ and other forestry standards such as the Gold Standard are in the running to be included in a Carbon Offset and Reduction Scheme for International Aviation (CORSIA).
This scheme, which is being voted on at the International Civil Aviation Organisation's (ICAO) annual meeting in October, would be mandatory but could include offsets from jurisdictional sector-specific carbon credits such as REDD+.
Outside of these developments, forestry credits continue to be a major force in the voluntary carbon market.
According to Ecosystems Marketplace's 2015 State of the Voluntary Carbon Market report, credits from forestry projects represent a third of all carbon credits in the market.
A better understanding of climate change means that forestry and land-use credits are more highly sought after, according to Ben Heneke, president of Clean Air Action Corporation, which won Best Offset Project.
"The biggest change since we launched in 1999 is that people get it now," he says. "We no longer have to explain climate change to people anymore, and we especially don't have to explain its effect to small farmers across the world, and forestry projects need the least explanation of all."
In 2008 French food company Danone launched what was then called the Danone Fund for Nature, with the help of the Ramsar Convention on Wetlands and the International Union for the Conservation of Nature.
The purpose of the fund was to tackle rural poverty by restoring degraded ecosystems through large-scale agroforestry, mangrove restoration and rural energy projects.
The success of the fund's pilot project – the world's largest mangrove restoration project located in Senegal – led Danone to partner with other companies and, in 2011, it turned the fund into an independent entity that was rebranded as the Livelihoods Carbon Fund.
This fund is unusual in that the corporations involved are all major, sophisticated carbon offsetters themselves.
"When addressing global challenges, no single institution can come up with solutions on its own, which is why a co-creative approach is essential to leveraging impact," says Bernard Giraud, president of Livelihoods Venture, which manages the fund. "We build public-private coalitions as the efforts of all actors are complementary to achieve efficient solutions at landscape level."
The €40 million fund has 10 investors: Danone, Schneider Electric, Crédit Agricole, Michelin, Hermès, SAP, CDC Climat, La Poste, Firmenich, and Voyageurs du Monde.
The purpose of the fund is not just to offset carbon, according to Giraud, but to produce the best quality offsets which provide the most impact.
"Carbon is a very good tracer for climate change. But it is also an excellent tracer for the improvement of the livelihoods of rural communities," he says. "When you restore mangroves you will of course generate carbon credits. But you primarily help regenerate the basis of an ecosystem providing food, wood and protection for rural communities. So you generate a very significant amount of benefits for people."
The success of this fund, which includes planting 130 million trees, led to Livelihoods' creating a second fund in 2015, the Livelihoods Fund for Family Farming (Livelihoods 3F).
This new fund, which has €120 million from Danone, Mars, Firmenich and Veolia, aims not only to produce carbon credits, but also to assimilate the sustainable raw materials generated from these projects into the supply chains of the investors.
"At Livelihoods, we focus on linking the restoration of natural resources to the improvement of the livelihoods of rural communities," says Giraud. "Carbon is one of the levers we use, but it's not the only one."
Investors in the new fund commit to buying raw materials from smallholder farmers concerned by the projects.